For this month’s blog, I thought I would focus on a longer topic that is ever increasing and trending particularly with all the high-end development in recent years.

Purchasing pre-construction, or colloquially, purchasing on spec refers to when you are agreeing to purchase something that hasn’t been built yet, typically off renderings drawn by the developer off what the tower or condo/house will look like or sometimes off a floor plan. There are advantages and disadvantages of buying this way, as explained below.

Advantages of Buying off Spec:

1. Deals, Paying Less: Typically when you are buying early, the developer does not begin the build until he has secured capital. Securing capital refers to securing the funds to build, typically financed by some portion of your deposit. The developer wants to build this capital, therefore you will typically in this stage get some discount or incentive.
2. Customization: This early in the process the developer may allow exceptions to the building. For example if you wanted to combine units, to create a custom floor plan, or allow for more bedroom space. The developer depending on architectural issues etc. may allow for this, creating your dream apartment, unique to the rest.
3. Hype: Hype or attraction to the building earlier on may be lower, therefore you can achieve better pricing, as the building progresses the value of your unit increases, and your investment becomes more attractive. Some developers may even allow consignment. This means that you have the right to sell you “unfinished unit” to another investor or buyer, therefore before it’s even built you can make a profit, purely over purchasing early.

Disadvantages of Buying off Spec:

1. Completion Date- The completion date is a rough estimate on when the building is going to be complete, most developers will have in the contracts a clause that stipulates that the building is estimated to be complete by a certain date, but subject to the following. The contract will list aspects such as subject to building issues, construction, weather factors etc. Whilst you have the right to fight construction delays and money demanded back, the contracts are typically fairly iron-clad.
2. Capital Tied Up: Typically for development, within the first year, 15-20% of the purchase price needs to be with the developer as funds held in trust, therefore let’s say the building takes 4 years to build, your funds are tied up, which means they aren’t earning a return elsewhere.
3. Not Liking the End Product: With all the technology for renderings, and floor plans, promises through advertisements, it is very easy to imagine they are going to build the most luxurious conduct on the market. The climate at the end of the four years could be very different. You could see the finished product and your views promised as unobstructed could now be obstructed with another tower, potentially diminish the return you thought you were going to receive. If you were counting on unobstructed views of let’s say the park, and in two years into the process you discover another tower next to yours that blocks they view, you are out of luck.

I hope that through this post, I have opened up your eyes to the positive and negative of buying off specifications and ask that you weight these options when purchasing.

I leave you with this, always risk mitigate in your head, and does buying off specification hurt you or help you?